This is unfortunately not a rare occurrence. It occurs almost every summer and at other times when energy demand increases. There is no clearer evidence that India’s electricity sector, dominated by coal-intensive power plants and state-owned utilities, is simply not up to the task. And the problem is only going to get worse: India has become rapidly electrified in recent years and peak power demand has grown by 8-10% a year.
The reasons for these successive crises of power are almost always the same. Thermal power plants produce three quarters of India’s electricity. But it seems they can never get enough coal on their hands.
Generation companies are sometimes unable to pay for coal shipments because, in turn, they have not been paid for by India’s electricity distribution companies, which have not anticipated this. Sometimes Coal India Ltd., the state-owned giant that produces 80% of India’s coal supply, doesn’t produce as much as it promised, either because its miners are on strike or for other reasons. Coal has sometimes been dug out of the ground but left at the mine head because Indian Railways cannot organize enough wagons or locomotives. At times, protesters disrupt the nation’s long supply chain for coal. Sometimes the imported coal that some plants prefer is not available or shipments are delayed.
Whatever the reason, the result is that India, notoriously reliant on coal, has coal-fired power plants running at 50% to 70% capacity, even at times of peak demand. Combined with the low rates set by long-term power purchase agreements, as well as chronically late payments, this means the entire business is not profitable. As expected, nobody wants to invest in the sector.
Common Indians are paying the price. Last month, utilities in the industrial state of Gujarat were forced to buy electricity on the spot market at three to four times the usual price, even as local thermal plants were operating at just 45% of capacity.
It has long been conventional wisdom in India that the country must remain dependent on coal because, unlike, say, crude oil, we are sitting on huge reserves. It is understandable that we do not want to rely entirely on imported energy. Energy security means macroeconomic stability.
The fact is, however, that India’s coal fleet has not been designed to take advantage of domestic coal. When many of these plants were planned a decade or more ago, they were expected to use coal from Indonesia or even Australia because those supplies were readily available, while India’s coal resources were difficult to exploit.
Imported coal is now much more expensive and supply is no longer reliable. But the cheapest domestic coal is often not of the quality that many plants are designed for; in 2017, the federal minister in charge complained that a third of India’s coal-fired capacity relied on imported coal. According to 2020 research by Stanford University economist Gireesh Shrimali, roughly the same proportion of these plants cost more to operate than the levelized cost of solar power in India.
As many analysts have since pointed out, the situation calls for more global investment in India to phase out coal, buy existing contracts, compensate affected communities and switch to renewable energy. After all, power crises hit India when temperatures are at their highest and the sun is shining. (It’s true that today’s solar power cells tend to work less efficiently at high temperatures.)
India cannot continue to rely on its hopelessly inefficient network of thermal power plants. The government’s own energy maps make it clear how inadequate it is for its purpose. While modern and efficient plants are located along the coasts and near ports, the country’s coal reserves lie inland. The geography means that getting domestic coal to newer power plants will always be a problem.
Unlike China, India has significantly scaled back its plans to expand its coal fleet. There is concern that the current crisis will cause a minor change in these plans and lead to the commissioning of new plants. But that obviously is not going to solve what is a structural problem.
Indians must look at our reliance on coal-fired electricity with an objective eye. Far from being cheap and reliable, it too often ends up being more expensive than it should be and absent when we need it most. Anything else coal can provide India is not energy security.
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This column does not necessarily reflect the opinion of the editorial board or of Bloomberg LP and its owners.
Mihir Sharma is a columnist for Bloomberg Opinion. He is a Senior Fellow at the Observer Research Foundation in New Delhi and Director of its Economics and Growth Program. He is the author of “Restart: The Last Chance for the Indian Economy” and co-editor of “What the Economy Needs Now.”
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